When you pay tax on savings, just spoken to HMRC

Ozzig

Shylock_249 said:

eskbanker said:

Shylock_249 said:

Is it NOT for consideration that if a saver puts money into a 5 year fixed rate bond where the interest is paid on maturity that if the tax rate in years one to four was 20% but year 5 was 25% the saver would be worse off?

Worse off than what?  Higher tax would impact all savers, i.e. the saver in this hypothetical situation will be paying the higher rate of tax on interest on their money in year five, regardless of whether they use fixed term or easy access accounts....

Would you NOT be paying 25% tax on the whole interest over five years whereas if interest was paid each year the tax deducted would be 20% for years one to four and only 25% for year five?

Personally, this is what I accepted as a risk when I signed up for a couple of longer fixed terms. I could plan interest payments without the fluctuations of five consecutive one year plans.

Optimistically, it could (but probably won't) work the other way as well, what if tax drops in year five?

intalex

I guess the rule is what it is, fair or not... the important question is whether savers are aware of it from the outset when they choose their options, else the impact could be significant...

I think this rule needs a headline article of its own on all meaningful sites that discuss savings... maybe titled something dramatic like "the death of compounding interest"...

masonic

Shylock_249 said:

eskbanker said:

Shylock_249 said:

Is it NOT for consideration that if a saver puts money into a 5 year fixed rate bond where the interest is paid on maturity that if the tax rate in years one to four was 20% but year 5 was 25% the saver would be worse off?

Worse off than what?  Higher tax would impact all savers, i.e. the saver in this hypothetical situation will be paying the higher rate of tax on interest on their money in year five, regardless of whether they use fixed term or easy access accounts....

Would you NOT be paying 25% tax on the whole interest over five years whereas if interest was paid each year the tax deducted would be 20% for years one to four and only 25% for year five?

You would be paying the prevailing tax rate at the time, which could be higher or lower than what it was when the account was opened. This would be in addition to potentially paying tax on more of the interest due to not being able to carry unused PSA forward.

I've not had any problem finding competitive multi-year fixes with interest paid away. You might have to sacrifice a few basis points vs the very top rate. but I would say it's well worth it.

Ozzig

intalex said:

I guess the rule is what it is,

Genuinely, what is it? 

We have Ben's update, reinforcing the advice on the MSE savings pages. But if I call HMRC and get the same agent I spoke to originally, would referring him to Ben's update be deemed enough to change his answer to my original question? 

Or when MSE checked with HMRC if they got through to the agent I spoke to, would their page have been updated? 

There should be clear advice in the HMRC guidelines, which is communicated to all their advisors, on the phone, on the help forum and everywhere in between.

Tax will always be a minefield, but there are hundreds of fixed-term products in the marketplace, that normally have very clear terms about if the interest is or is not accessible until maturity. HMRC needs to be clear about when the earned interest should be declared.

masonic

Ozzig said:

intalex said:

I guess the rule is what it is,

Genuinely, what is it? 
We have Ben's update, reinforcing the advice on the MSE savings pages. But if I call HMRC and get the same agent I spoke to originally, would referring him to Ben's update be deemed enough to change his answer to my original question? 
Or when MSE checked with HMRC if they got through to the agent I spoke to, would their page have been updated? 
There should be clear advice in the HMRC guidelines, which is communicated to all their advisors, on the phone, on the help forum and everywhere in between.
Tax will always be a minefield, but there are hundreds of fixed-term products in the marketplace, that normally have very clear terms about if the interest is or is not accessible until maturity. HMRC needs to be clear about when the earned interest should be declared.

The rules are clear, most of the confusion comes from disbelief that they are what they are. How someone can be compliant with the rules, on the other hand, is a major challenge. HMRC can't even get it right.

DavidAC

Well now I am in a bit of a mess. I want to open a fixed rate account, preferably 2 or 3 years. I expect to be working and paying tax on savings next tax year, but not the year after. There is NS&I 3 year Green bond 5.7% added annually, paid at maturity. There is a 2 year 5.95% (opened before the rate dropped but not funded) that will be taxed annually, now DF capital 18 month 5.95% paid at maturity. So, if I retire some time during the 2024/2025 tax year what NET rate will I get on each? I have sent a secure message to DF asking if any interest is taxed next tax year.

masonic

DavidAC said:

Well now I am in a bit of a mess. I want to open a fixed rate account, preferably 2 or 3 years. I expect to be working and paying tax on savings next tax year, but not the year after. There is NS&I 3 year Green bond 5.7% added annually, paid at maturity. There is a 2 year 5.95% (opened before the rate dropped but not funded) that will be taxed annually, now DF capital 18 month 5.95% paid at maturity. So, if I retire some time during the 2024/2025 tax year what NET rate will I get on each? I have sent a secure message to DF asking if any interest is taxed next tax year.

No need for a secure message as it is covered in the FAQ:

For Fixed Term accounts, all of the interest will be taxable at maturity, and as it isn't even applied until maturity, they shouldn't be reporting any figures to HMRC that could mislead them into thinking any different.

DavidAC

I did read that, but it seems HMRC cannot give a clear answer so can DF be sure? DF say "applied at the end of the term", and "can be withdrawn or reinvested at maturity" to make things a bit less clear.

masonic

DavidAC said:

I did read that, but it seems HMRC cannot give a clear answer so can DF be sure? DF say "applied at the end of the term", and "can be withdrawn or reinvested at maturity" to make things a bit less clear.

I don't see any inconsistency in those two quotes (end of the term = at maturity). HMRC have given clear instructions on what savings providers must report to them, and it is also clear when interest arises for tax. The issue is when those two are not the same, but in this case they are.

If interest were applied annually, you'd have the problem described in this thread, with HMRC assuming it was taxable in the year it was credited, but interest is not credited annually.

DavidAC

It would just be clearer if they said applied at maturity, I know (I think) maturity and end of the term should be referring to the same date, like 18 months from application or first funding, whichever they go by.